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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1997
COMMISSION FILE NUMBER: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 ELKRIDGE LANDING ROAD, LINTHICUM, MD 21090
(Address of Principal Executive Offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
8530 CORRIDOR ROAD, SAVAGE, MD 20763
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 22, 1997
Common stock. $.01 par value 96,244,983
Page 1 of 21 pages
Exhibit Index appears on page 19
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CIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and six months ended April 30, 1996
and April 30, 1997 3
Consolidated Balance Sheets
October 31, 1996 and April 30, 1997 4
Consolidated Statements of Cash Flows
Six months ended April 30, 1996 and
April 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk - Not applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
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Item 1. Financial Statements
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Quarter Ended Six Months Ended
April 30, April 30, April 30, April 30,
1996 1997 1996 1997
-------- --------- -------- ---------
Revenue $ -- $ 86,669 $ -- $ 140,602
Cost of goods sold -- 32,008 -- 52,840
-------- --------- -------- ---------
Gross profit -- 54,661 -- 87,762
-------- --------- -------- ---------
Operating expenses:
Research and development 1,746 4,699 4,219 7,749
Selling and marketing 700 4,485 1,191 7,083
General and administrative 526 2,106 1,025 8,401
-------- --------- -------- ---------
Total operating expenses 2,972 11,290 6,435 23,233
-------- --------- -------- ---------
Income (loss) from operations (2,972) 43,371 (6,435) 64,529
Interest and other income 292 1,968 459 2,360
Interest expense (55) (91) (93) (193)
-------- --------- -------- ---------
Income (loss) before income taxes (2,735) 45,248 (6,069) 66,696
Provision for income taxes -- 17,646 -- 26,011
-------- --------- -------- ---------
Net income (loss) $ (2,735) $ 27,602 $ (6,069) $ 40,685
======== ========= ======== =========
Pro forma net income (loss) per common
and common equivalent share $ (0.03) $ 0.26 $ (0.06) $ 0.40
======== ========= ======== =========
Pro forma weighted average common and
common equivalent shares outstanding 99,111 104,457 99,111 101,493
======== ========= ======== =========
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31, April 30,
1996 1997
----------- -----------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,557 $ 180,791
Accounts receivable, net 16,759 31,187
Inventories, net 13,228 22,859
Deferred income taxes 1,834 4,308
Prepaid expenses and other 634 1,108
-------- ---------
Total current assets 55,012 240,253
Equipment, furniture and fixtures, net 11,863 36,092
Other assets 426 392
-------- ---------
Total assets $ 67,301 $ 276,737
======== =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligations $ 960 $ 988
Current maturities of notes payable 69 --
Accounts payable 6,278 15,150
Accrued liabilities 5,242 21,268
Income taxes payable 3,342 10,246
Deferred revenue 3,265 652
-------- ---------
Total current liabilities 19,156 48,304
Capital lease obligations, less current installments 2,186 1,691
Notes payable, less current maturities 487 --
Deferred income taxes -- 17,560
Deferred rent 98 585
-------- ---------
Total liabilities 21,927 68,140
Commitments and contingencies -- --
Mandatorily redeemable preferred stock - par value $.01,
16,250,000 shares authorized: 14,663,148 and zero
issued and outstanding; 40,404 --
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares
authorized; zero shares issued and outstanding -- --
Common stock - par value $.01; 180,000,000 shares
authorized; 13,191,585 and 96,241,858 shares issued
and outstanding 132 962
Additional paid-in capital 339 162,502
Notes receivable from stockholders (60) (111)
Retained earnings 4,559 45,244
-------- ---------
Total stockholders' equity 4,970 208,597
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity $ 67,301 $ 276,737
======== =========
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended April 30,
--------------------------
1996 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ (6,069) $ 40,685
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activites:
Non-cash charges from equity transactions -- 20
Write down of leasehold improvements -- 571
Depreciation and amortization 431 3,157
Provision for doubtful accounts -- 200
Provision for inventory excess and obsolescence 588 2,098
Provision for warranty and other contractual obligations -- 5,872
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 4 (14,628)
Increase in prepaid expenses and other (1) (474)
Increase in inventories (8,249) (11,729)
Increase in deferred income tax asset -- (2,474)
Decrease (increase) in other assets 8 (396)
Increase in accounts payable and accruals 2,100 19,026
Increase in income taxes payable -- 6,904
Increase (decrease) in deferred revenue and deferred rent 77 (2,125)
-------- ---------
Net cash (used in) provided by operating activities (11,111) 46,707
-------- ---------
Cash flow from investing activities:
Additions to equipment, furniture and fixtures (3,631) (27,526)
-------- ---------
Net cash used in investing activities (3,631) (27,526)
-------- ---------
Cash flow from financing activities:
Principal payments on notes payable -- (556)
Net proceeds from issuance of or subscription to mandatorily
redeemable preferred stock 25,950 --
Proceeds from issuance of common stock and warrants 11 122,517
Tax benefit related to exercise of stock warrants -- 17,560
Proceeds from lease financing activities 1,077 --
Principal payments on capital lease obligations (233) (468)
-------- ---------
Net cash provided by financing activities 26,805 139,053
-------- ---------
Net increase in cash and cash equivalents 12,063 158,234
Cash and cash equivalents at beginning of period 5,032 22,557
-------- ---------
Cash and cash equivalents at end of period $ 17,095 $ 180,791
======== =========
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim consolidated financial statements included herein for CIENA
Corporation (the "Company") have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the consolidated financial statements
included in this report reflect all normal recurring adjustments which the
Company considers necessary for fair presentation of the results of operations
for the interim periods covered and of the financial position of the Company at
the date of the interim consolidated balance sheet. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
financial statements should be read in conjunction with the Company's October
31, 1996 audited financial statements and notes thereto included in the
Company's Form S-1 Registration Statement for its initial public offering of
Common Stock (the "IPO"), declared effective on February 7, 1997.
Principles of Consolidation
During the second quarter ended April 30, 1997, the Company formed
three wholly owned subsidiaries for the purpose of segregating aspects of the
Company's business. The accompanying consolidated financial statements include
the accounts of the Company and all of its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain customer
acceptance or has agreements pertaining to installation services, revenue is
deferred until no significant obligations remain. Revenue for installation
services is recognized as the services are performed. Amounts received in
excess of revenue recognized are included as deferred revenue in the
accompanying balance sheets. For distributor sales where risks of ownership
have not transferred, the Company recognizes revenue when the product is
shipped through to the end user.
During the six months ended April 30, 1997, all of the Company's
revenue was attributable to a single product and to three customers.
Computation of Pro Forma Net Income (loss) per Share
Pro forma net income (loss) per common and common equivalent share is
computed using the pro forma weighted average number of common and common
equivalent shares outstanding. Pro forma weighted average common and common
equivalent shares include Common Stock, stock options and warrants using the
treasury stock method and shares issued upon conversion of all outstanding
shares of Mandatorily Redeemable Preferred Stock.
Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, stock options, warrants and convertible Mandatorily Redeemable
Preferred Stock issued by the Company during the twelve months immediately
preceding the filing of the initial registration statement and through the
effective date of such registration statement have been included in the
calculation of the pro forma weighted average shares outstanding using the
treasury stock method based on the IPO price.
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CIENA CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, April 30,
1996 1997
(audited) (unaudited)
-------- --------
Raw materials $ 8,585 $ 15,124
Work-in-process 3,629 5,864
Finished goods 2,951 5,352
-------- --------
15,165 26,340
Less reserve for excess and obsolescence (1,937) (3,481)
-------- --------
$ 13,228 $ 22,859
======== ========
(3) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
October 31, April 30,
1996 1997
(audited) (unaudited)
-------- --------
Equipment, furniture and fixtures $ 11,647 $ 29,115
Leasehold improvements 1,141 9,019
-------- --------
12,788 38,134
Accumulated depreciation and amortization (1,388) (4,114)
Construction-in-progress 463 2,072
-------- --------
$ 11,863 $ 36,092
======== ========
(4) NOTES PAYABLE
In June 1996, the Company borrowed $556,000 from the Maryland Economic
Development Corporation for the construction of leasehold improvements and
executed promissory notes of $500,000 and $56,000 with annual interest rates of
$6.63% and 3.00%, respectively. In April 1997, the Company repaid the notes in
full.
(5) ACCRUED LIABILITIES - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
In March 1997, the Company entered to an agreement to lease an
additional facility of approximately 57,000 square feet in Linthicum, Maryland.
The lease term is five years with a minimum lease obligation of approximately
$663,000 per year.
Legal and related costs
Included in general and administrative expenses for the six months
ended April 30, 1997, is an accrual of approximately $5.0 million representing
management's estimate of certain legal and related costs associated with the
Company's defense of pending litigation, of which approximately $4.6 million
remains as of April 30, 1997. See Part II, Item 1, "Legal Proceedings".
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Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
October 31, April 30,
1996 1997
(audited) (unaudited)
--------- -----------
Warranty and other contractual obligations $ 1,584 $ 6,635
Accrued compensation 2,314 3,348
Unbilled construction-in-process and leasehold improvements 50 2,883
Legal and related costs 300 4,817
Other 994 3,585
------- -------
$ 5,242 $21,268
======= =======
(6) STOCKHOLDERS' EQUITY
The Company completed its IPO of 5,750,000 shares, inclusive of 750,000
shares from the exercise of the underwriters over-allotment option, at a price
of $23 per share on February 7, 1997. Net proceeds from the offering were
approximately $121.8 million with an additional $0.6 million received from the
exercise of certain outstanding warrants. As of April 30, 1997, the Company's
income taxes currently payable for both federal and state purposes have been
reduced by a tax benefit of approximately $17.6 million resulting from
exercises of certain stock warrants which amount has been credited directly to
long-term deferred income taxes.
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PART I. - FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
risks and uncertainties. The Company has set forth in a Form 8-K Report, as
filed with the Securities and Exchange Commission on February 19, 1997, a
detailed statement of risks and uncertainties relating to the Company's
business. In addition, set forth below under the heading "Risk Considerations"
is a further discussion of certain of those risks as they relate to the period
covered by this report, the Company's near term outlook with respect thereto,
and the forward-looking statements set forth herein; however, the absence in
this quarterly report of a complete recitation of or update to all risk factors
identified in the Form 8-K should not be interpreted as modifying or
superseding any such risk factor, except to the extent set forth below.
Investors should review this quarterly report in combination with the Form 8-K
in order to have a more complete understanding of the principal risks
associated with an investment in the Company's Common Stock.
OVERVIEW
CIENA Corporation is a leading supplier of dense wavelength division
multiplexing ("DWDM") systems to long distance fiberoptic telecommunications
carriers. CIENA's DWDM systems alleviate capacity constraints and enable
flexible provisioning of additional bandwidth on high-traffic routes in
carriers' networks.
The Company completed its IPO of 5,750,000 shares, inclusive of 750,000
shares from the exercise of the underwriters over-allotment option, at a price
of $23 per share on February 7, 1997. Net proceeds from the offering were
approximately $121.8 million with an additional $0.6 million received from the
exercise of certain outstanding warrants. The Company has added the net
proceeds from the offering and from the exercise of the warrants to working
capital. Pending use of the net proceeds, the Company has invested such funds
in short-term, interest bearing investment grade obligations.
Revenues for the six months ended April 30, 1997 of $140.6 million were
the result of MultiWave(TM) 1600 systems sales to Sprint Corporation
("Sprint"), LDDS WorldCom ("WorldCom") and, through the Company's Japanese
distributor, Teleway Japan Corporation ("Teleway").
The Company is engaged in continuing efforts to expand its
manufacturing capabilities. In April 1997 the Company moved its
non-manufacturing operating functions to an approximately 96,000 square foot
facility near the Baltimore/Washington International Airport in Linthicum,
Maryland. The vacated areas of the 50,500 square foot facility in Savage,
Maryland are currently being renovated for manufacturing capabilities.
Approximately two thirds of the improvements are completed, with the balance
expected to be completed in the third quarter of 1997. In March 1997 the
Company signed a lease for an additional facility of approximately 57,000
square feet located in Linthicum. This space is expected to be used for
additional manufacturing requirements and expanded customer service operations.
As of April 30, 1997 the Company employed 443 persons, which was an
increase of 142 persons over the quarter ended January 31, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
REVENUE. The Company recognized $86.7 million in Multiwave 1600 system
revenue for the second quarter ended April 30, 1997. The Company had no revenue
for the comparable quarter ended April 30, 1996. Second quarter 1997 revenues
were largely the result of continued Multiwave 1600 systems sales to Sprint and
WorldCom as well as the initial product acceptance and revenue recognition of
Multiwave 1600 systems shipped to Teleway.
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GROSS PROFIT. Gross profits were $54.7 million for the second quarter
ended April 30, 1997 with no comparable gross profits for the quarter ended
April 30, 1996. Gross margin was 63.1% for the second quarter ended April 30,
1997. The Company's gross margins in the future may be affected by a number of
factors, including competitive market pricing, manufacturing volumes and
efficiencies and fluctuations in component costs. See "Risk Considerations".
The Company's future gross margins may also be affected by the mix of product
features and configurations sold in a period as well as the extent of services
provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $4.7 million and $1.7 million for the second quarters ended April 30, 1997
and April 30, 1996, respectively. Approximately $3.0 million or 169% increase
in research and development expenses was related to increased staffing levels,
purchase of materials used in development of new or enhanced product
prototypes, and outside consulting services in support of certain developments
and design efforts. During the second quarter ended April 30, 1997, research
and development expenses were 5.4% of revenue. The Company believes its
research and development expenditures will continue to increase in absolute
dollars and perhaps as a percentage of revenue during the remainder of fiscal
year 1997 to support the continued development of the MultiWave system, the
exploration of new or complementary technologies, the development of new or
enhanced product prototypes, and the pursuit of various cost reduction
strategies. The Company expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$4.5 million and $0.7 million for the second quarters ended April 30, 1997 and
1996, respectively. The increase was primarily the result of increased staffing
levels in the areas of sales, technical assistance and field support, and
increases in commissions earned, trade show participation and promotional
costs. During the second quarter ended April 30, 1997, selling and marketing
expenses were 5.2% of revenue. The Company anticipates that its selling and
marketing expenses will increase in absolute dollars and perhaps as a
percentage of revenue during the remainder of fiscal year 1997 as additional
personnel are hired and offices opened to allow the Company to pursue new
market opportunities. The Company also expects the portion of selling and
marketing expenses attributable to technical assistance and field support will
increase as the Company's installed base of operational MultiWave systems
increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $2.1 million and $0.5 million for the second quarters ended April
30, 1997 and 1996, respectively. The increase was primarily the result of
increased staffing levels and outside consulting services. During the second
quarter ended April 30, 1997, general and administrative expenses were 2.4% of
revenue. The Company believes that its general and administrative expenses for
the remainder of fiscal 1997 will increase in absolute dollars during the
remainder of fiscal year 1997 due to the expansion of the Company's
administrative staff required to support its expanding operations and an
increase in expenses associated with operating as public company.
OPERATING MARGINS. The Company's operating margin for the second
quarter ended April 30, 1997 was $43.4 million or 50.0% of revenue. The Company
expects that its operating margins will decrease as it continues to hire
additional personnel and increase operating expenses to support its business.
INTEREST AND OTHER INCOME. Interest income and other income increased
to $1.9 million for the second quarter ended April 30, 1997 from $0.2 million
for the same period in 1996. The net increase was attributable to higher
invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
was 39% of pretax earnings, or $17.6 million for the second quarter ended April
30, 1997. Through April 30, 1996, a valuation allowance had been recorded to
offset the Company's deferred tax assets, including the possible future benefit
from the realization of tax operating loss carry forwards.
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SIX MONTHS ENDED APRIL 30, 1996 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
REVENUE. The Company recognized $140.6 million in Multiwave 1600 system
revenue for the six months ended April 30, 1997. The Company had no revenue for
the comparable six months ended April 30, 1996. The Company began shipping the
MultiWave 1600 system for field testing in May 1996 with customer acceptance by
Sprint occurring in July 1996. The MultiWave 1600 system began carrying live
traffic in the Sprint network in October 1996, and the field trials in the
WorldCom and Teleway networks were successfully completed in December 1996 and
March 1997, respectively. Revenues for the six months ended April 30, 1997 were
the result of Multiwave 1600 systems sales to Sprint as well as the initial
product acceptance and revenue recognition of Multiwave 1600 systems shipped to
WorldCom and Teleway.
GROSS PROFIT. Gross profits were $87.8 million for the six months ended
April 30, 1997 with no comparable gross profits for the six months ended April
30, 1996. Gross margin was 62.4% for the six months ended April 30, 1997. The
Company's gross margins in the future may be affected by a number of factors,
including competitive market pricing, manufacturing volumes and efficiencies
and fluctuations in component costs. See "Risk Considerations". The Company's
future gross margins may also be affected by the mix of product features and
configurations sold in a period as well as the extent of services provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $7.7 million and $4.2 million for the six months ended April 30, 1997 and
April 30, 1996, respectively. The approximate $3.5 million or 83% increase in
research and development expenses from the six months ended April 30, 1996 to
the six months ended April 30, 1997 was related to increased staffing levels,
purchase of materials used in development of new or enhanced product
prototypes, and outside consulting services in support of certain developments
and design efforts. During the six months ended April 30, 1997, research and
development expenses were 5.5% of revenue. The Company expects that its
research and development expenditures will continue to increase in absolute
dollars and perhaps as a percentage of revenue during the remainder of fiscal
year 1997 to support the continued development of the MultiWave system, the
exploration of new or complementary technologies, and the pursuit of various
cost reduction strategies. The Company has expensed research and development
costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$7.1 million and $1.2 million the six months ended April 30, 1997 and April 30,
1996, respectively. The approximate $5.9 million or 495% increase was primarily
the result of increased staffing levels in the areas of sales, technical
assistance and field support, and increases in commissions earned, trade show
participation and promotional costs. During the six months ended April 30,
1997, selling and marketing expenses were 5.0% of revenue. The Company
anticipates that its selling and marketing expenses will increase in absolute
dollars perhaps as a percentage of revenue during the remainder of fiscal year
1997 as additional personnel are hired and offices opened to allow the Company
to pursue new market opportunities. The Company also expects the portion of
selling and marketing expenses attributable to technical assistance and field
support will increase as the Company's installed base of operational MultiWave
systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $8.4 million and $1.0 million for the six months ended April 30,
1997 and April 30, 1996, respectively. The approximate $7.4 million increase
for the six months ended April 30, 1996 was primarily the result of a $5.0
million charge to accrue estimated legal and related costs associated with
pending litigation, of which $.4 million has been paid as of April 30, 1997.
See Part II, Item 1 "Legal Proceedings". The remaining balance was primarily
the result of increased staffing levels and outside consulting services. During
the six months ended April 30, 1997, general and administrative expenses were
6.0% of revenue. The Company believes that its general and administrative
expenses for the remainder of fiscal 1997 will increase from the $3.4 million
level ($8.4 million less the $5.0 million estimated legal and related costs
accrual) incurred in the six months ended April 30, 1997 due to the expansion
of the Company's administrative staff required to support its expanding
operations and an increase in expenses associated with operating as public
company.
OPERATING MARGINS. The Company's operating margin for the six months
ended April 30, 1997 was $64.5 million or 45.9% of revenue and would have been
$69.5 million or 49.4% of revenue exclusive of the $5.0 million accrual for
estimated legal and related costs. The Company expects that its operating
margins, exclusive of the $5.0 million accrual for estimated legal and related
costs, will decrease as it continues to hire additional personnel and increase
operating expenses to support its business.
INTEREST AND OTHER INCOME. Interest income and other income increased
to $2 million for the six months ended April 30, 1997 from $0.4 million for the
same period in 1996. The net increase was attributable to higher invested cash
balances.
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PROVISION FOR INCOME TAXES. The Company's provision for income taxes
was 39% of pretax earnings, or $26.0 million for the six months ended April 30,
1997. Through April 30, 1996, a valuation allowance had been recorded to offset
the Company's deferred tax assets, including the possible future benefit from
the realization of tax operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company's principal source of liquidity was its
cash and cash equivalents of $180.8 million, which increased by $158.2 million
from October 31, 1996. In November 1996, the Company established an unsecured
$15.0 million bank revolving line of credit. Borrowings under this line bear
interest at the bank's prime rate. As of April 30, 1997, there were no
borrowings outstanding under the line of credit.
Cash generated from operations was $46.7 million for the first six
months ended April 30, 1997. This amount was principally attributable to net
income adjusted for the non-cash charges of depreciation, amortization,
provisions for inventory obsolescence and warranty, increases in accounts
payable, accrued expenses and income tax payable; offset by increases in
accounts receivable and inventory due to increased revenue and to the general
increase in business activity.
Investment activities during the six months ended April 30, 1997 were
for capital expenditures of $27.5 million. Capital equipment expenditures in
the first six months of 1997 totaled $17.5 million and were primarily for test,
manufacturing and computer equipment. In addition, during the first six months
of 1997 the Company used $10.0 million for the construction of leasehold
improvements associated with its manufacturing and non-manufacturing facilities
in Savage and Linthicum, Maryland. In March 1997 the Company signed a lease for
an additional facility of approximately 57,000 square feet. This space is
expected to be used for additional manufacturing requirements and expanded
customer service operations. The Company intends to spend up to an additional
$6.0 million to $7.0 million in improving its facilities later in fiscal 1997.
Cash generated from financing activities during the six months ended
April 30, 1997 was $139.0 million. This amount was primarily the result of the
net proceeds from the Company's February 7, 1997 initial public offering of
approximately $121.8 million and a $17.6 million tax benefit related to
exercise of stock warrants.
The Company believes that the net proceeds from its February 7, 1997
initial public offering, combined with its existing cash balance, its line of
credit and cash flows expected from future operations, will be sufficient to
meet the Company's capital requirements for at least the next 18 to 24 months.
NEWLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 simplifies the earnings per share (EPS)
computation and replaces the presentation of primary EPS with a presentation of
basic EPS. This statement also requires dual presentation of basic and diluted
EPS on the face of the income statement for entities with a complex capital
structure and requires a reconciliation of the numerator and denominator used
for the basic and diluted EPS computation. The Company is not required to
implement SFAS No. 128 until Fiscal 1998; however, if implemented in the
current period, the weighted average shares outstanding for basic EPS and the
resulting EPS would be 89,287,000 and $.31 for the quarter ending April 30,
1997, 51,962,000 and $.78 for the six months ending April 30, 1997, 12,862,000
and $(.21) for the quarter ending April 30, 1996 and 12,331,000 and $(.49) for
the six months ending April 30, 1996. Diluted EPS under SFAS No. 128 will be
the same as currently presented.
RISK CONSIDERATIONS
MANAGEMENT OF EXPANSION. The Company is experiencing rapid expansion in
all areas of its operations, particularly in manufacturing, and the Company
anticipates that this expansion will continue in the near future. Total
personnel grew from 301 at January 31, 1997 to 443 at April 30, 1997. Total
facilities' space in use has increased from 50,500 square feet in one facility
as of the fiscal year ended October 31, 1996, to approximately 210,000 square
feet in three facilities by the end of May 1997. This expansion, and the
attendant separation and relocation of various operating functions to different
facilities, has placed strains on the material, financial and personnel
resources of the Company and will continue to do so. The rapid pace
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13
and volume of new hiring, and the accelerated ramp up in manufacturing capacity,
if not effectively managed, could adversely affect the quality or efficiency of
the Company's manufacturing process. The Company continues to increase its flow
of materials, optical assembly, final assembly and final component module and
system test functions in anticipation of a level of customer orders that has not
been historically experienced by the Company and that may not be achieved. Given
the small number of existing and potential customers for the Company's systems,
the adverse effect on the Company resulting from a lack of effective management
in any of these areas will be magnified. Inability to manage the expansion of
the Company's business would have a material adverse effect on its business,
financial condition and results of operations. The Company is also seeking to
achieve ISO 9001 certification for its manufacturing facility. The Company's
failure to achieve such certification would have a material adverse effect on
its competitive position.
RECENT PRODUCT INTRODUCTION. The Company's first operational systems
began carrying live traffic for Sprint in October 1996 and for Teleway in April
1997, and therefore do not have a history of live traffic operation over an
extended period of time. If reliability, quality or network monitoring problems
should develop, a number of material and adverse effects could result,
including manufacturing rework costs, high service and warranty expense, high
levels of product returns, delays in collecting accounts receivable, reduced
orders from existing customers and declining level of interest from potential
customers. The Company is aware of instances in which installation and
activation of certain MultiWave 1600 systems have been delayed due to faulty
components found in certain portions of these systems. There are a considerable
number of the Company's systems scheduled to be turned up for live traffic
operation over the next three to five months. The Company expects there will be
interruptions or delays from time to time in the activation of the systems,
particularly because the Company does not control all aspects of the
installation and activation activities. If significant interruptions or delays
occur, or if their cause is not promptly identified, diagnosed and resolved,
confidence in the MultiWave 1600 system could be undermined. An undermining of
confidence in the MultiWave 1600 system would have a material adverse effect on
the Company's customer relationships, business, financial condition and results
of operations.
COMPETITION. The Company believes the rapid pace at which the need for
higher and more cost-effective bandwidth has developed was not widely
anticipated in the telecommunications industry. The Company believes its timely
introduction of an open-architecture based DWDM system at the early stages of
this intensifying need has enabled it to achieve a market leadership position
in the long distance portion of the industry. However, competition in the
global telecommunications industry historically has been dominated by a small
number of very large companies, each of which have greater financial, technical
and marketing resources, greater manufacturing capacity and more established
customer relationships with network operators than the Company. Each of Lucent
Technologies Inc., formerly part of AT&T Corporation ("Lucent"), Alcatel
Alsthom Group ("Alcatel"), Northern Telecom Inc. ("Nortel"), NEC Corporation
("NEC"), Pirelli SpA ("Pirelli"), Siemens AG ("Siemens") and Telefon AB LM
Ericsson are expected to move aggressively to capture market share in the DWDM
market. The Company expects aggressive competitive moves to include early
announcement of competing or alternative products, and significant price
discounting. While competition in general is broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate network needs and
foreseeable scaleability requirements, the Company's customers are themselves
under increasing competitive pressure to deliver their services at the lowest
possible cost. This pressure may result in pricing for DWDM systems becoming a
more important factor in customer decisions, thereby detracting from the
advantages the Company may otherwise possess by reason of its market leadership
position.
Intellectual property disputes may also be asserted as part of a
competitive effort to reduce the Company's leadership position and limit its
ability to achieve greater market share, even if the merits of specific
disputes are doubtful. See "Intellectual Property Rights".
There can be no assurance that the Company will be able to compete
successfully with its competitors or that aggressive competitive moves faced by
the Company will not result in lower prices for the Company's products,
decreased gross profit margins, and otherwise have a material adverse effect on
its business, financial condition and results of operations.
CONCENTRATION OF POTENTIAL CUSTOMERS; DEPENDENCE ON MAJOR CUSTOMERS.
The Company has only four current customers and few potential customers,
consisting almost exclusively of long distance telecommunications carriers.
There are only a small number of long distance telecommunications carriers, and
that number may decrease if and as customers merge with or acquire one another.
The Company believes it is satisfactorily moving through the long and
unpredictable sales cycles
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typically involved in the development of additional customer relationships in
this industry; however, substantially all of the Company's revenue for fiscal
1997 continues to be expected to be derived from Sprint Corporation and LDDS
WorldCom ("WorldCom"). The reduction, delay or cancellation of orders, or a
delay in shipment of the Company's products to either of these customers, or the
inability of the Company to develop additional customers in the long distance
telecommunications market, could and likely would have a material adverse affect
on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS. The Company believes the increased
visibility and credibility of DWDM technologies and solutions has made DWDM
technologies and know-how in general increasingly valuable intellectual
properties. The Company believes this increasing value in an industry marked by
a few very large competing suppliers represents a competitive environment where
intellectual property disputes are likely. Intellectual property disputes may
be initiated by competitors against the Company for tactical purposes to gain
competitive advantage or overcome competitive disadvantage, even if the merits
of specific disputes are doubtful. The successful resolution of such disputes
may depend, in part, on the extent of the Company's portfolio of intellectual
property rights which could be available for cross-licensing as a means of
settling disputes. The Company's current portfolio of patents is not as broad
or extensive as those of its major competitors, and there is no assurance the
Company will be able to add to its patent portfolio. In the future, the Company
may be required to bring or defend against other litigation to enforce any
patents issued, assigned to, or co-owned by the Company, to protect trademarks,
trade secrets and other intellectual property rights owned by the Company, to
defend the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any
litigation, including the Pirelli litigation described in Part II, "Legal
Proceedings", could be costly and a diversion of management's attention, which
could have a material adverse effect on the company's business, financial
condition and results of operations.
LEGAL PROCEEDINGS. See Part II, "Legal Proceedings" for disclosure
concerning recent developments in certain litigation proceedings to which the
Company is a party.
COMPETITORS AS SUPPLIERS. Certain of the Company's component suppliers
are both primary sources for such components and major competitors in the
market for system equipment. For example, the Company buys certain key
components from Lucent, Alcatel, Nortel, NEC and Siemens, each of which offers
optical communications systems and equipment which are competitive with the
Company's MultiWave 1600 system. Lucent is the sole source of two integrated
circuits and is one of two suppliers of Erbium-doped fiber. Alcatel and Nortel
are suppliers of lasers used in the MultiWave 1600 system. NEC is a supplier of
certain testing equipment. The Company's business, financial condition and
results of operations could be materially and adversely affected if these
supply relationships were to decline in reliability or otherwise change in any
manner adverse to the Company. Although the Company has not experienced to date
any decline in reliability among these vendors, this risk factor increases in
importance given the Company's expansion efforts and the increasingly
competitive environment in which the Company operates.
FLUCTUATION IN QUARTERLY AND ANNUAL RESULTS. The Company's revenue and
operating results are likely to vary significantly from quarter to quarter and
from year to year as a result of a number of factors, including the size and
timing of orders, product mix and shipments of systems. The timing of order
placement, size of orders, satisfaction of contractual customer acceptance
criteria, as well as order delays or deferrals and shipment delays and
deferrals, may cause material fluctuations in revenue. The Company's dependence
on a small number of existing and potential customers increases the revenue
impact of each customer's actions relative to these factors. The Company's
expense levels in the future will be partially based on its expectations of
long term future revenue and as a result net income any quarterly period in
which material orders are shipped or delayed or not forthcoming could vary
significantly. Quarter-to-quarter sequential growth rates in the first two or
three years of operations are likely to vary widely and therefore may not be
reliable indicators of annual performance.
NEW PRODUCT DEVELOPMENT DELAYS. The Company's ability to anticipate
changes in technology, industry standards, customer requirements and product
offerings and to develop and introduce new and enhanced products will be
significant factors in the Company's ability to remain a market leader in the
deployment of DWDM systems. The complexity of the technology involved in
product development efforts in the DWDM field can result in unanticipated
delays. The failure in the future to deliver new and improved products in a
timely fashion relative to customer expectations could have a material adverse
effect on the Company's competitive position.
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15
STOCK PRICE ISSUES
SHARES ELIGIBLE FOR SALE ON AND AFTER AUGUST 7, 1997. The Company's IPO
involved the sale of 5,750,000 shares, and only these shares were initially
eligible to be traded in the public market. All but approximately 500,000 of
the Company's approximately 88 million pre-IPO shares outstanding were "locked
up" from sale on the public market for 180 days following the IPO by agreement
between the IPO underwriters and individual Company stockholders. At the time
of the Company's IPO, approximately 71 million of the 88 million pre-IPO shares
outstanding were expected to first become eligible for trading upon expiration
of the lock up agreement. However, because of certain recent amendments of
Rule 144 under the Securities Act of 1933, the holding periods formerly
required by Rule 144 have been shortened, such that all locked up shares will
become eligible for trading upon expiration of the lock up agreement.
The Company's IPO underwriters' have agreed to release 10% of the locked up
shares for trading on the public market effective with the opening of trading
on Tuesday, May 27, 1997. The balance of the locked up shares will become
eligible for sale on August 7, 1997. The owners of all locked up shares have
experienced substantial appreciation in the value of their shares relative to
the price paid for them. In the event all or a significant portion of these
stockholders elect to sell their shares the price of the Company's stock could
materially decline, irrespective of the Company's operating performance.
Further releases of a portion or portions of the locked up shares, or a possible
secondary offering of some portion of the locked up shares may occur prior to
August 7, 1997. There is no assurance that either of these will occur, or if
they occur, that they will materially reduce the number of previously locked up
shares which will first become available for sale on August 7, 1997 or
otherwise alleviate the selling pressure that may apply to the Company's
publicly traded stock.
STOCK PRICE VOLATILITY. The Company's Common Stock price has experienced
substantial price volatility, and is likely to continue to do so. Such
volatility can arise as a result of any divergence between the Company's actual
or anticipated financial results and published expectations of analysts and as
a result of announcements by the Company and its competitors. Such divergence
is likely to occur from time to time, particularly in light of the Company's
dependence on a small number of existing and potential customers, long and
unpredictable sales cycles and customer purchasing programs, fluctuating
quarterly results, and the absence of unconditional minimum purchase
commitments from any customer. In addition, the market prices of the common
stock of many technology companies have experienced extreme price and volume
fluctuations, and the Company's stock price may be similarly impacted,
irrespective of the Company's operating performance.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PIRELLI LITIGATION. On December 20, 1996, a U.S. affiliate of Pirelli
filed suit in U.S. District Court in Delaware, alleging willful infringement by
the Company of five U.S. patents held by Pirelli. The lawsuit seeks treble
damages, attorneys' fees and costs, as well as preliminary and permanent
injunctive relief against the alleged infringement. On February 10, 1997, the
Company filed its answer denying infringement, alleging inequitable conduct on
the part of Pirelli in the prosecution of certain of its patents, and stating a
counterclaim against the relevant Pirelli parties for a declaratory judgment
finding the Pirelli patents invalid and/or not infringed. Following the filing
of the Company's answer, Pirelli dedicated to the public and withdrew from the
lawsuit all infringement claims relating to one of the five patents.
Discovery proceedings are ongoing, and are currently expected to be
completed by September 30, 1997, with trial expected no earlier than February
1998.
The Company has filed a complaint against Pirelli with the
International Trade Commission ("ITC"), based on the Company's belief that a 32
channel DWDM system announced by Pirelli infringes at least two of the
Company's patents. The Company's complaint seeks a ban on the importation by
Pirelli into the U.S. of any infringing 32 channel system. A formal
investigative proceeding was instituted by the ITC on April 3, 1997. Discovery
proceedings are now ongoing, and a full hearing of the matter is currently
scheduled for December 1997.
On March 14, 1997, the Company filed suit against Pirelli in U.S.
District Court in the Eastern District of Virginia, alleging willful
infringement by Pirelli of three U.S. patents held or co-owned by the Company.
The lawsuit seeks treble damages, attorneys' fees and costs, as well as
permanent injunctive relief against the alleged infringement. The patents at
issue relate to certain of Pirelli's cable television equipment, to Pirelli's 4
and 8 channel WDM systems, and to certain Pirelli fiberoptic communications
equipment announced by Pirelli in January 1997 as being deployed in a field
trial in the MCI network. Pirelli's motion to dismiss or transfer for lack of
jurisdiction was denied April 28, 1997. Discovery proceedings are now ongoing,
with trial expected by late fall 1997.
The Company continues to believe its MultiWave(TM) 1600 system does not
infringe any claim of the four remaining Pirelli patents, and believes certain
claims of the Pirelli patents may be invalid. The Company intends to defend
itself vigorously, and is planning on all litigation proceeding through trial.
In light of the complexity and likely time-consuming nature of the litigation,
including the Company's counterclaim, the ITC proceeding, and the Company's
patent infringement lawsuit against Pirelli in the Eastern District of
Virginia, the Company accrued during the first fiscal quarter of 1997
approximately $5.0 million in estimated legal and related costs associated with
these proceedings. While the Company believes its estimate of legal and related
costs is
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16
adequate based on its current understanding of the overall facts and
circumstances, the estimate may be increased later in the fiscal year depending
on the course of the legal proceedings.
The Company expects that the Pirelli proceedings will not only be
costly but will also involve a substantial diversion of the time and attention
of some members of management. Further, the Company believes Pirelli and other
competitors have used the existence of the Delaware litigation to raise
questions in customers' and potential customers' minds as to the Company's
ability to manufacture and deliver the MultiWave(TM) 1600 system. There can be
no assurance that such efforts by Pirelli and others will not disrupt the
Company's existing and prospective customer relationships.
There can be no assurance that the Company will be successful in the
Pirelli litigation, and an adverse determination in the Delaware court could
result from a finding of infringement of only one claim of a single patent. The
Company may consider settlement due to the costs and uncertainties associated
with litigation in general and patent infringement litigation in particular and
due to the fact that an adverse determination in the litigation could preclude
the Company from producing the MultiWave(TM) 1600 system until it were able to
implement a non-infringing alternative design to any portion of the system to
which such a determination applied. There can be no assurance that any
settlement will be reached by the parties. An adverse determination in, or
settlement of, the Pirelli litigation could involve the payment of significant
amounts, or could include terms in addition to such payments, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
KIMBERLIN LITIGATION. Kevin Kimberlin and parties controlled by him
(the "Kimberlin Parties") are owners of Common Stock of the Company, the
substantial majority of which has been derived from the conversion at the time
of the Company's IPO of Series A, Series B and Series C Preferred Stock then
owned by them. On November 20, 1996, the Kimberlin Parties filed suit in U.S.
District Court for the Southern District of New York against the Company, and
certain directors of the Company, alleging that the Kimberlin Parties were
entitled to purchase additional shares of Series C Preferred Stock at the time
of the closing of the Series C Preferred Stock financing, but were denied that
opportunity by the defendants. The lawsuit alleges that certain rights of first
refusal existing under the Series B Preferred Stock Purchase Agreement entitled
the Kimberlin Parties to purchase more shares of Series C Preferred Stock than
were in fact purchased by them at the time of the closing of the Series C
Preferred Stock financing in December 1995. The lawsuit claims breach of
contract, breach of fiduciary duty and violation of Securities and Exchange
Commission Rule 10b-5 by the defendants. On January 6, 1997, the Company filed
its answer to the Kimberlin Parties complaint, and filed a counterclaim for
rescission of the sale of the shares of Series C Preferred Stock purchased by
the Kimberlin Parties in the Series C Preferred Stock financing.
The Kimberlin Parties amended their complaint in May 1997, alleging
that the same facts and conduct with respect to the private placement of Series
C Preferred Stock represent a violation of federal insider trading laws.
The number of shares to be purchased by each party to the Series C
Preferred Stock financing was communicated in writing to the Kimberlin Parties
in December 1995 prior to the Series C closing. Further, as permitted under the
Series B Preferred Stock Purchase Agreement, the Series C Preferred Stock
Purchase Agreement expressly stated that all rights of first refusal referred
to in the lawsuit were waived. The required number of Series B investors,
including the Kimberlin Parties, signed the Series C Preferred Stock Purchase
Agreement containing that waiver. In July 1996, the Kimberlin Parties
reaffirmed to the Company in writing that their beneficial ownership of shares
did not include any shares which they have subsequently claimed in the lawsuit
they were entitled to purchase.
The Company believes that the Kimberlin Parties' claims, brought as the
Company's IPO was being prepared, and the amended claims, are without merit and
intends to defend itself vigorously. Discovery proceedings are now ongoing.
ITEM 2. CHANGE IN SECURITIES
During the quarter ended April 30, 1997, the Company issued an
aggregate of 1,566,300 shares of Common Stock in connection with the exercise
of stock options by optionees under the Company's Amended and Restated 1994
Stock Option Plan. The Company received an aggregate of $91,246.50 in payment
of the exercise prices of the options. The exercises occurred at various times
throughout the quarter and the shares sold in connection with those exercised
were not registered in reliance on the exemption provided under Section 4(2) of
the Securities Act of 1933, as amended.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following are annexed as Exhibits:
Exhibit
Number Description
------ -----------
11.0 Statement of Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed February 19, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
Date: May 22, 1997 By: /s/ Patrick H. Nettles
------------ -----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: May 22, 1997 By: /s/ Joseph R. Chinnici
------------ -----------------------
Joseph R. Chinnici
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit Number Description Page
- - -------------- ----------- ----
11.0 Statements Regarding Computation of Per Share
Earnings (loss) for the three and six months ended April 30,
1997 and three and six months ended April 30, 1996 20
27.0 Financial Data Schedule 21
19
1
CIENA CORPORATION
EXHIBIT 11
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER SHARE
Three months ended Six Months Ended
April 30, April 30, April 30, April 30,
1996 1997 1996 1997
------------- ------------ ------------- ------------
Net income (loss) $ (2,735,000) $ 27,602,000 $ (6,069,000) $ 40,685,000
============= ============ ============= ============
Weighted average shares of common
stock outstanding 12,862,000 22,488,000 12,331,000 18,563,000
Weighted average effect of convertible
preferred stock on as-if-converted
basis 73,316,000 73,316,000 67,118,000 73,316,000
Weighted average effect of common
stock equivalents 9,200,000 8,627,000 8,955,000 8,098,000
Staff Accounting Bulletin No. 83
issuances and grants:
Common shares issued within one
year of intial filing 330,000 26,000 861,000 935,000
Common stock equivalents issued within
one year of initial filing 3,403,000 -- 3,648,000 581,000
Convertible preferred stock issued within
one year of initial filing -- -- 6,198,000 --
------------- ------------ ------------- ------------
99,111,000 104,457,000 99,111,000 101,493,000
============= ============ ============= ============
Pro forma net income (loss) per common
and common equivalent share $ (0.03) $ 0.26 $ (0.06) $ 0.40
============= ============ ============= ============
20
5
1,000
3-MOS
OCT-31-1997
FEB-01-1997
APR-30-1997
180,791
0
31,387
200
22,859
240,253
40,206
4,114
276,737
48,304
0
0
0
962
207,635
276,737
86,669
86,699
32,008
32,008
11,290
0
91
45,248
17,646
27,602
0
0
0
27,602
0.26
0.26
